Political Meddling May Undermine European Bank Stress Tests, Wyplosz Says

By Scott Hamilton -
Jul 22, 2010

Charles Wyplosz, the director of the
International Centre for Monetary and Banking Studies in Geneva,
said political interference has undermined European bank stress
tests and he doesn’t have faith in the results.

“The big problem is that the stress tests were a
concession among the heads of states about a month ago under
market pressure,” Wyplosz said in a radio interview with Tom Keene on “Bloomberg Surveillance” today. “They have
masterminded every step of it and for a lot of people, including
me, it tells me that I won’t put too much confidence in what
they come up with.”

European Union regulators are examining the strength of 91
banks to determine if they can survive potential losses from
both a recession and a decline in the value of their government-
bond holdings. The tests are being used to reassure investors
about the health of financial institutions from Germany’s WestLB
AG and Bayerische Landesbank to savings banks in Spain. Banks
and regulators will release results of the tests tomorrow.

“There is conflictual information circulating all over the
place, so we just don’t know how stressful these tests really
are,” Wyplosz said. “If politicians start getting involved in
stress tests, we’re not in safe hands.”

He also highlighted the dilemma facing governments as they
juggle the threat from budget deficits created during the global
financial crisis and the risk that consolidating public finances
will push countries back into recession.

“Governments are now stuck between two bad solutions: one
is to do expansionary fiscal policy and risk the wrath of
financial markets,” he said. “The other option is to try and
please financial markets and announce fiscal stabilisation and
provoke a relapse into recession. Hopefully, in between, there
is a smart path, but that’s not what most governments have been
doing. Most governments have been bending over backward to show
how tough they are on their fiscal policies.”